Last week, the OPEC+ oil producers held a meeting that lasted no more than 20 minutes - the quickest one ever in its history. This indicates the conviction among all members in their prior agreement for a gradual easing of production restrictions due to demand ticking up faster than expected and which had the price of a barrel go past $70 for the first time since March.
What conclusions can be drawn regarding oil prices for the rest of this year and 2022? The outcomes will cast a major influence over the global economy - and on oil economies, including those in the Gulf. It is important to take cues from current or expected developments to build on, and disregard some of the unrealistic forecasts floating around that impact markets for speculative gains.
The first of these facts is that there is no oversized production capacity, and whatever surplus exists is concentrated mainly in the GCC countries, specifically Saudi Arabia, the UAE and Kuwait. The rest of the oil producers have limited excess capacity, and investments by major oil companies have been almost non-existent over the past two years, due to sharp declines in demand and the deterioration in prices caused by the coronavirus pandemic.
Pumping in new investments will thus need more time to contribute to global oil stocks, which means that an increase in current supply will remain limited. Another fact relates to expectations about the return of Iranian exports after the expected agreement on its nuclear programme with the US, an issue that was considered when OPEC+ took its decisions during its last meeting. This means the Iran supply has been included within the organisation’s output ceiling. Hence, there will be no surprises related to this issue, given that the Iranian oil fields need extensive rehabilitation after the suspension of exports.
Back into movement mode
The third point is that the next few months will see a massive movement in the global economy, as vaccinations and precautionary measures help significant progress towards recovery. This will lead to increasing demand for oil, which is expected to continue and end up with the refill of reservoirs in preparation for winter. This may increase the gap between supply and demand if OPEC+ countries do not increase production beyond their plans.
Additionally, there has been a decline in US shale oil production as a result of President Biden's plans to cut fossil fuel production due to its impact on climate change. As a result, US crude oil inventories fell by more than 5 million barrels, according to the American Petroleum Institute.
Therefore, OPEC+ data shows that by the end of this year, demand will increase to approximately 99 million barrels per day versus supply of 97.5 million barrels, which could push prices up to $75 in the fourth quarter. This is what’s prompting members to comply with the restrictions they had agreed on.
The world, particularly oil producing countries, will see an expected recovery in the second half of this year and next year and help overcome most of the economic repercussions from the coronavirus phase. This will provide GCC countries with conditions conducive for new investments to promote diversification and provide more jobs - the current recovery in oil prices also allows another opportunity that must be exploited.
- Mohammed Al Asoomi is a specialist in energy and Gulf economic affairs.